The big motivation for large real estate investors [7] was the yield they could potentially receive from purchasing real estate in depressed markets. Early adopters entered the market in 2008 and 2009 and by 2010 the market was flood by big money investors [7]. Today we are seeing a saturation in terms of investors and yields are not worth the time for many large funds. For example, rents in Arizona and Nevada are down from where they were in 2010 in spite of the rapid rise in housing values. It could be because there is a saturation of rentals in these markets or simply because incomes are weak in these areas. One thing is certain and some investors are losing their appetite for rental real estate. Another interesting trend involves higher inventory and subsequently and ease in the volume of bidding wars. What are some of the trends in the current housing market?
Rental analysis
[8]
One interesting trend is the large rise in rents for New York since 2010. Los Angeles rents appear to be steady or falling somewhat according to the median list price. The rental trend in Los Angeles appears the same as it does for the nation.
What is interesting is when comparing housing values:
[9]
Los Angeles is one of the markets that has turned around quickly. The trend isn’t evenly distributed as the chart above highlights. The big jump in New York rents is interesting since home values according to the above seem to be fairly stable. Unlike Arizona and Nevada with falling rents and incredible jumps in home values, New York would seem to justify a move up in prices when looking at rents.
The young and in debt
Americans overall receive a large portion of their reported net worth through real estate equity. Since many young Americans bought near or at the peak, they never really had the chance to accumulate any equity growth. Many also bought with FHA insured mortgages [10] or low down payment loans stretching their budgets. Because of this, net worth for older households has largely recovered from the peak but for younger households, they are still down by a whopping 40 percent from the peak:
[11]
Source: New York Times
The main reason? Negative equity. The debt still remains connected to peak housing values and while stocks are near record levels, real estate values nationwide still have a long way to go to reach those previous peaks.
Bidding wars easing up
Redfin has an interesting report on bidding wars. Of course the most competitive markets seem to be in California. Take a look at the bidding war trend:
[12]
Source: Redfin [13]
The main reason for this? The largest monthly inventory increase in three years might help to ease off some of the insanity in the current market. This might offer some wiggle room around the country but the heat is still on in manic California [14]:
[15]
Look how crazy the San Francisco market is in terms of competition. In May, over 96 percent of winning bids were over asking price! Orange County and San Diego had very high numbers here as well. So if you are out there in this mania and are losing out, this is probably why.
Going after strategic defaulters
A large number of people strategically defaulted during the height of the bust and many thought they were off free and clear. Now that prices are up, banks are looking into those strategic defaults from the past:
“(WaPo [16]) [Freddie Mac spokesman Brad German] said Freddie Mac is targeting “strategic defaulters,” which the agency defines as “someone who had the means but chose to go into default, that there were no extenuating circumstances that affected their ability to pay. If you’re choosing not to pay off your mortgage, but you’re paying other bills, we would consider that strategic default.”
In 2011, Fannie and Freddie flagged 12 percent of 298,327 properties they had foreclosed on — more than 35,000 — for deficiency judgments in an attempt to collect $2.1 billion in unpaid mortgage debt, according to an inspector general’s report released in October from the Federal Housing Finance Agency.”
Americans seemed to be shocked that data was being collected on them while they post their entire lives chronicled by the minute on Facebook voluntarily. So it should be no surprise that our GSEs were also tracking those strategic defaulters. Now that times are good and equity is back up, you might be receiving a letter if you strategically walked away from your mortgage and had assets in other investment vehicles.
The trends suggest that rents are tight because incomes are tight. You also see that bidding wars might be reaching an apex in terms of manic fever in some markets [14]. In the end, the momentum is still on the upside but for how long? Can the Fed continue to purchase MBS and risk inflating that $3.3 trillion balance sheet even further? The fact that inventory is rising is a good sign for most Americans.
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